By: Nicolas Petit (Pro Market)
In antitrust policy circles, Joseph Schumpeter’s “creative destruction” theory is often mentioned but seldom listened to. The Schumpeterian neglect is understandable, but unfortunate. [Understandable, because the historical record of the economy involves mostly incremental/imitative entrants rather than the radical breakthroughs associated with creative destruction (Teece, 2018).]
My recent book Big Tech and the Digital Economy: The Moligopoly Scenario sheds light on how Schumpeter’s insights give us a useful model of “indirect entry” that fits the tendencies of competition in digital industries. Schumpeter considered that the main source of economic competition is wrought by product differentiation, complements, or new combinations, not by imitation, replication, and substitution of existing products. He colorfully stressed that this is as powerful “as bombardment is in forcing a door” (Teece, 2020).
The issue matters because the theory of government regulation of industry operates on a different assumption. The main source of competition that keeps markets free and competitive comes from entry of substitute products. And a suspicion of anticompetitive conduct by incumbents or of structural market failure arises when direct entry is not observed. The recent US antitrust charges against Google bring a good example. The engine of the case against Google brought by the Department of Justice is that by purpose or effect, Google’s payments to Apple and other original equipment manufacturers (OEMs) for pre-installation restricted the entry of rival search engines like DuckDuckGo.
But when the Schumpeterian model of “indirect entry” is added to standard assumptions and suspicions, a refined policy emerges. The prescription is neither less nor more Government intervention, but a different one. To see this, let us consider first models of indirect entry (1) and why they suit digital industries (2), explore high-level implications for policymaking (3), and discuss concrete illustrations by looking at two ongoing cases against big tech firms (4)….
